Review of Industrial Organization 17: 135–153, 2000.
© 2000 Kluwer Academic Publishers. Printed in the Netherlands.
Vertical Restraints and the Market Power of Large
WILLIAM S. COMANOR
and PATRICK REY
University of California, Santa Barbara and Los Angeles, U.S.A.;
University of Social Sciences
and IDEI, Toulouse, France, CEPR, London, U.K.
Key words: Antitrust policy, exclusive dealing arrangements.
The economic literature on vertical restraints typically emphasizes problems of
vertical coordination among manufacturers and distributors, such as free-riding.
To explore such issues, interactions between manufacturers and retailers are com-
monly examined in the context of a single producer and a large number of dis-
tributors. If that picture of vertical restraints is correct, they are likely to be pro-
competitive, although that result is not necessarily so.
In such circumstances,
vertical restraints are not a major problem for competition policy.
In contrast, this paper explores the impact of vertical restraints on competition
between alternate vertical structures. It notes that, even though incumbent manu-
facturers and distributors may each beneﬁt from increased competition at the other
stage of production (that is, a manufacturer would beneﬁt from alternate lines of
distribution, and distributors would prefer dual sources of supply), they understand
that both would suffer if competition increased at both stages, as this would foster
competition between rival structures. Therefore, it is in their joint interest to main-
tain an effective alliance with their established partners to prevent entry at both
stages of production.
This paper is part of a larger project on “Competition Policy in a Global Economy” that is sup-
ported by The Japan Foundation, Center for Global Partnership. We appreciate the helpful comments
of H. E. Frech, Bruno Jullien, Kai-Uwe Kühn, Steven Salop, Marius Schwartz, Leonard Waverman,
and Ralph Winter.
Similarly, such actions can be used by large distributors to achieve better coordination with their
suppliers. For a review of this literature, see Katz (1989).
Comanor (1985), Rey and Tirole (1986) and Caillaud and Rey (1987).
Another strand of literature has emphasized the role of vertical restraints as a means to reduce
interbrand competition among producers. See Bonanno and Vickers (1988) and Rey and Stiglitz
Two papers have explored the process by which these restraints are used to exclude rivals.
Aghion and Bolton (1987) show that exclusive supply agreements with penalty clauses can deter the